A credit score is a rating that helps lenders predict how likely your are to make credit payments on time.

Credit scores affect whether you can get credit and what you pay for credit cards, auto loans, mortgages and other kinds of credit. Our focus today is to look at your credit as it relates to the mortgage process.

The credit score is also know as FICO score, named after the company that developed the model, Fair Isaac Corporation.

Let's look at the five parts of your FICO score. FICO scores range from 300-850. The higher the score, the better your chances are for better products and lower interest rates.

1. Your payment history-about 35% of a FICO score

Have you paid your credit accounts on time? Late payments, bankruptcies  collections and other negative items can hurt your credit score. But a solid record of on-time payments helps your score.

2. How much you owe-about 30% of a FICO score

FICO scores look at the amounts you owe on all your accounts, the number of accounts with balances, and how much of your available credit you are using. The more you owe compared to your credit limit, the lower your score will be.
This looks at cumulative amounts. That's why it's a good idea NOT to continually open and close credit card accounts.

5 credit cards with a credit limit of $5,000 each = cumulative credit limit of $25,000.

Say your cumulative balance is $10,000; your available credit is $15,000.

If you close off two cards with 0 balances, now your credit limit is $15,000, but your balances total $10,000 and your available credit is now only $5,000. This hurts your credit score; you are at 75% of your total credit limit.

Ideally you want your cumulative balances to be between 40%-50% or lower of your total cumulative credit limit. Just paying down balances could greatly improve your credit rating, jumping 20, 50 points or more.

3. The length of credit history-about 15% of a FICO score

A longer credit history will increase your score. However, you can get a high score with a short credit history if the rest of your credit report shows responsible credit management.  A longer credit history is why it's not a good idea to close credit cards that you've had for a long time, especially if you have a good history of 10 years or more with a particular creditor. When you close it and apply for newer cards with lower interest rates, you loose your history and now you have cards that are a few months old as opposed to 10 years old. Not that it's ever wrong to close and open new accounts. But it must be rare and NEVER just before applying for a mortgage. Recentcy of activity on your credit report also hurts your score. See below.

4. New credit-about 10% of a FICO score

If you have recently applied for or opened new credit accounts, your credit score will weigh this fact against the rest of your credit history. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. If you need a loan, do your shopping within a focused period of time, such as 30 days, to avoid lowering your FICO score. This is why it is not wise to have too many inquiries prior to and during the mortgage application process. The worse thing you can do is apply to too many lenders, as well as apply for different types of credit. Personal loans, auto loans, openening new department store credit cards; even an inquiry to extend an existing line of credit on a credit card will lower your score. During the refi boom, I have seen some folks with challenged credit shop themselves out of a loan by going to too many lenders, just to save an 1/8 % interest rate!

5. Other factors-about 10% of a FICO score

Several minor factors also can influence your score. For example, having a mix of credit types on your credit report-credit cards, installment loans such as a mortgage or auto loan, and personal lines of credit-is normal for people with longer credit histories and can add slightly to their scores.

What is a good Score?

FICO scores range from 300-850 and most people score in the 600s and 700s. Lenders buy your FICO scores from the three national credit reporting agencies (also called credit bureaus) Equifax, Experian and TransUnion.

Lenders like to see FICO credit scores above 700 as a sign of good financial health. Scores below 600 indicate high risk to lenders and could lead lenders to charge you much higher rates or turn down your application.
Some lenders even go to the mid-to-low 500's. However at higher interest rates and a greater restriction on the amount financed. These folks would not qualify for 100% financing.

Check your credit report

Congress recently established an annual credit report service to make it easier for consumers to get their credit reports and credit scores from the three national credit reporting agencies. This is free once a year.
www.annualcreditreport.com
(877) 322-8228
Annual Credit Report Request Service
P.O Box 105281
Atlanta, GA 30348

There are fee based services such as MYFICO.COM

www.myfico.com
(800) 342-6726

Or the individual credit reporting agencies directly.

Experian  TransUnion  Equifax   Fair Isaac
PO Box 2002  PO Box 1000  PO Box 740241  200 Smith Ranch Road 
Allen, TX 75013  Chester, PA 19022 Atlanta, GA 30374 San Rafael, CA 94903 
(888) 379-3742  (800) 888-4213  (800) 685-1111  (800) 777-2066 
www.Experian.com www.transunion.com www.equifax.com  www.myfico.com

Improving your credit scores can help you:

• Lower your interest rates
• Speed up credit approvals
• Reduce deposits requires by utilities
• Get better credit card, auto loan and mortgage offers.

Paying your bills on time, controlling your amount of debt and monitoring your credit will ensure you a decent credit score.